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Change of accounting standards – From GAAP to Ind-AS

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India is changing its accounting standards from Generally accepted accounting principles (GAAP) to Indian Accounting Standards (Ind-AS) from April 2016. The change of accounting standards will drastically change the performance outlook of companies, while some will find more profits in their financial sheets and others could find holes in their profits.

  • Any company, whether listed or unlisted, with a total net-worth of Rs 500 crore or above would have to follow Ind-AS.

Change of accounting standards – From GAAP to Ind-AS

Accounting standards would have impact on company’s profits, goodwill, market capitalisation and net-worth. Here are some important changes:

  • Revenue recognition – The biggest change would be on the process of revenue recognition as Ind-AS would take time value of money in to consideration while calculating revenue which is absent under GAAP.
  • Goodwill calculation – As per new standards Indian companies would have to calculate their goodwill on fair value basis which means for some companies their goodwill would decrease but for some it could go up.
  • Return on investment – For many companies ROI would fall significantly as their net worth would increase significantly after their goodwill would be calculated on fair value basis.
  • Change of FIs – Some of the financial instruments that are currently treated as equity would be treated as liability. For eg: Any investor that has invested in a company through convertible preference share or redeemable preference share it would go in to the company’s accounts as liabilities. Under GAAP it is considered equity.

Banks and NBFCs are not required to follow the Ind-AS from 2016 as of now as RBI has not given a green signal but the companies that have NBFC subsidiaries would have to follow Ind-AS.

Ind-AS could see more foreign investments as foreign investors would have global common standards to compare Indian companies with the rest of the world.

Indian Accounting Standards are a set of accounting standards notified by the Ministry of Corporate Affairs which are converged with International Financial Reporting Standards (IFRS).

  • These accounting standards are formulated by Accounting Standards Board of Institute of Chartered Accountants of India.
  • It contains high quality information and is transparent for users and are comparable over all periods presented.