In the dynamic world of finance and accounting, staying ahead of the curve is not just an advantage; it’s a necessity. Indian Accounting Standards (Ind AS) are constantly evolving to align with global best practices, enhance transparency, and provide a clearer picture of a company’s financial health. The Ministry of Corporate Affairs (MCA) has recently notified a series of amendments to Ind AS that will significantly impact how companies prepare and present their financial statements.
Whether you’re a seasoned chartered accountant, a finance professional, or a business owner, understanding these changes is crucial for ensuring compliance and making informed decisions. This comprehensive guide will walk you through the key amendments to Ind AS, breaking down the complexities into easy-to-understand insights. We’ll explore the implications of these changes, provide practical guidance, and help you navigate the evolving landscape of Indian accounting.
Section 1: Decoding the 2025 Amendments (Second Amendment Rules)
The Companies (Indian Accounting Standards) Second Amendment Rules, 2025, have introduced some pivotal changes that will be effective from April 1, 2025. Let’s delve into the specifics.
Navigating the Nuances of Liability Classification (Ind AS 1)
One of the most significant amendments is to Ind AS 1, Presentation of Financial Statements, which refines the classification of liabilities as current or non-current.
Current vs. Non-Current Liabilities: A Deeper Dive
The amendment provides much-needed clarity on how to classify liabilities, particularly when the right to defer settlement is subject to certain conditions. A liability is classified as non-current only if the entity has a substantive right to defer settlement for at least twelve months after the reporting period. This right must have substance and be in existence at the end of the reporting period.
What Does This Mean in Practice?
This change requires a more careful assessment of the terms of loan agreements and other liabilities. Companies will need to evaluate whether their right to defer settlement is unconditional or if it depends on meeting certain covenants.
The Covenant Clause: A Game-Changer for Lenders and Borrowers
The amendment introduces specific guidance on the impact of covenants on liability classification. If a company is required to comply with certain covenants on or before the reporting date, and it fails to do so, the liability may need to be reclassified as current, even if the original maturity date is more than twelve months away.
The Impact on Financial Ratios
This change can have a significant impact on a company’s financial ratios, such as the current ratio and the debt-to-equity ratio. It’s crucial for companies to proactively monitor their compliance with covenants to avoid any surprises at the year-end.
Illuminating Supplier Finance Arrangements (Ind AS 7 & 107)
In a move to enhance transparency, the amendments to Ind AS 7, Statement of Cash Flows, and Ind AS 107, Financial Instruments: Disclosures, introduce new disclosure requirements for supplier finance arrangements.
What are Supplier Finance Arrangements?
Supplier finance arrangements, also known as reverse factoring, are financing arrangements where a financial institution agrees to pay a company’s suppliers on its behalf. These arrangements can have a significant impact on a company’s cash flows and working capital management.
New Disclosure Requirements: Transparency is Key
The amendments require companies to disclose qualitative and quantitative information about their supplier finance arrangements. This includes:
- The key terms of the arrangements.
- The carrying amount of the financial liabilities that are part of the arrangements.
- The range of payment due dates.
- The effect of the arrangements on the company’s liquidity risk.
Tackling International Tax Reforms (Ind AS 12)
The amendment to Ind AS 12, Income Taxes, is a response to the global tax landscape, particularly the Pillar Two model rules developed by the OECD.
Understanding the Pillar Two Model Rules
The Pillar Two model rules aim to ensure that large multinational enterprises (MNEs) pay a minimum level of tax on their income arising in each jurisdiction where they operate.
Impact on Multinational Corporations
Companies that are part of MNE groups with a global turnover of more than €750 million will be affected by this amendment. They will be required to:
- Disclose that they have applied the exception to recognizing and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes.
- Provide known or reasonably estimable information that helps users of financial statements to understand the company’s exposure to Pillar Two income taxes.
Section 2: The 2025 Amendments (First Amendment Rules)
The Companies (Indian Accounting Standards) Amendment Rules, 2025, have also brought in a key change to Ind AS 21, effective from April 1, 2025.
Addressing Currency Exchangeability Issues (Ind AS 21)
The amendment to Ind AS 21, The Effects of Changes in Foreign Exchange Rates, provides guidance on how to determine the spot exchange rate when a currency is not exchangeable.
The Challenge of Non-Exchangeable Currencies
In some cases, a company may operate in a country where the local currency is not freely convertible into other currencies. This can make it challenging to translate foreign currency transactions and balances.
New Guidance on Estimating Spot Exchange Rates
The amendment provides a framework for estimating the spot exchange rate when a currency lacks exchangeability. This involves using an observable exchange rate that meets certain criteria, such as being for a currency that is exchangeable into the functional currency.
Section 3: A Look Back at the 2024 Amendments
The Companies (Indian Accounting Standards) Amendment Rules, 2024, introduced a new standard on insurance contracts and made consequential amendments to other standards.
Revolutionizing Insurance Accounting (Ind AS 117)
Ind AS 117, Insurance Contracts, has replaced the earlier standard, Ind AS 104, and has brought about a fundamental change in the way insurance contracts are accounted for.
Key Features of the New Standard
Ind AS 117 introduces a new measurement model for insurance contracts, which is based on a “building block” approach. This model requires insurers to:
- Estimate the future cash flows from insurance contracts.
- Discount these cash flows to their present value.
- Include a risk adjustment for non-financial risk.
- Recognize a contractual service margin, which represents the unearned profit from the contracts.
Impact on the Insurance Sector
This new standard has had a profound impact on the insurance industry. It has led to significant changes in the financial statements of insurance companies, providing a more transparent and comparable view of their performance and financial position.
Aligning with the New Insurance Standard
The introduction of Ind AS 117 necessitated amendments to several other standards to ensure consistency. These include:
- Ind AS 101, First-time Adoption of Indian Accounting Standards
- Ind AS 103, Business Combinations
- Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations
- Ind AS 107, Financial Instruments: Disclosures
- Ind AS 109, Financial Instruments
- Ind AS 115, Revenue from Contracts with Customers
Section 4: Key Takeaways from the 2023 Amendments
The amendments in 2023 also brought some important clarifications and changes.
Materiality Matters (Ind AS 1)
The amendment to Ind AS 1 replaced the term “significant accounting policies” with “material accounting policies.” This change emphasizes the importance of providing disclosures that are material to the users of the financial statements.
Accounting Estimates vs. Accounting Policies (Ind AS 8)
The amendment to Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors, clarified the definition of an accounting estimate. This helps in distinguishing between a change in an accounting estimate and a change in an accounting policy.
Deferred Tax on Leases and Decommissioning Obligations (Ind AS 12)
The amendment to Ind AS 12 narrowed the scope of the initial recognition exemption for deferred tax. This means that companies are now required to recognize deferred tax on transactions that give rise to both an asset and a liability, such as leases and decommissioning obligations.
Conclusion
The recent amendments to Ind AS are a testament to India’s commitment to aligning its accounting standards with the best in the world. While these changes may present some initial challenges in terms of implementation, they will ultimately lead to more transparent, comparable, and reliable financial reporting.
By staying informed about these amendments and proactively assessing their impact, you can ensure that your organization is well-prepared for the future of financial reporting in India.
FAQs
What is the effective date for the latest amendments to Ind AS?
The most recent amendments, including the Companies (Indian Accounting Standards) Second Amendment Rules, 2025, and the First Amendment Rules, 2025, are effective from April 1, 2025. This means they will apply to financial statements for the period beginning on or after this date (i.e., for the financial year 2025-26).
How does the amendment to Ind AS 1 change the classification of a loan with covenants?
The amendment to Ind AS 1 clarifies that a liability is classified as non-current only if the company has a substantive right to defer its settlement for at least 12 months after the reporting date. If this right depends on complying with covenants, the company must have complied with those covenants by the reporting date. If the covenants are breached as of the balance sheet date, the right to defer is lost, and the liability must be classified as current, even if the lender has not yet demanded repayment.
Why were new disclosure requirements for supplier finance arrangements introduced in Ind AS 7 and Ind AS 107?
The new disclosure requirements were introduced to increase transparency. Supplier finance arrangements (or reverse factoring) can significantly impact a company’s working capital and cash flows, but their effect was often not clearly visible in the financial statements. The new rules require companies to provide detailed information about these arrangements, helping investors and analysts better understand the company’s liquidity position and financial risk.
What was the main purpose of introducing Ind AS 117, Insurance Contracts?
Ind AS 117 was introduced to replace the previous standard, Ind AS 104, and to create a single, consistent, and principle-based accounting model for all insurance contracts. Its main purpose is to make the financial statements of insurance companies more transparent and comparable globally. It provides a more accurate picture of an insurer’s financial position and performance by changing how insurance liabilities and revenue are measured and recognized.
What is the key difference between an “accounting policy” and an “accounting estimate” as clarified by the amendment to Ind AS 8?
An accounting policy refers to the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements (e.g., using the FIFO method for inventory valuation). An accounting estimate is a monetary amount in the financial statements that is subject to measurement uncertainty (e.g., estimating the useful life of an asset or determining the provision for bad debts). The amendment to Ind AS 8 provides a clearer definition to help companies distinguish between the two, which is important because a change in policy is applied retrospectively, while a change in estimate is applied prospectively.
