By Dezan Shira & Associates
Publications Editor: Samuel Wrest
Foreign companies establishing a presence in India will encounter a host of considerations that do not exist in their home country. Of these, interpreting and understanding India’s idiosyncratic system of accounting standards can be an especially difficult challenge.
Until recently, India, like many countries in Asia, employed an antiquated set of generally accepted accounting principles (GAAP) that often proved difficult for foreign firms to adhere to. In order to have these standards converge more closely with international financial reporting standards (IFRS), the Institute of Chartered Accountants in India (ICAI) set out to introduce a new system, called simply Indian Accounting Standards (Ind-AS).
The first phase of Ind-AS was implemented in April 2011 and introduced a total of 35 new accounting standards, including ones on income taxes, impairment of assets and statements of cash flows. Subsequent phases were implemented in April 2013 and April 2014.
On February 16, 2015, the Ministry of Corporate Affairs (MCA) released a roadmap for the next phase of implementation, to be active from April 1, 2016. The map is intended to bring both domestic and foreign companies with a minimum net worth of Rs 500 crore into full compliance with Ind-AS and, therefore, into effective compliance with IFRS. This will be extended to companies with a net worth of Rs 250 crore by April 1, 2017. Ind-AS-based comparative figures for the previous year will also be required.
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Even with this latest implementation phase, there are still some notable differences between Ind-AS and IFRS, as can be seen in our graphic to the below. While the ICAI may eventually attempt to fully incorporate IFRS into Ind-AS, this will likely not occur for a number of years. It is therefore important for foreign firms operating in India to fully understand the differences in accounting standards that still exist.
Overall, however, the accounting changes introduced by Ind-AS are positive for foreign firms operating in India. Implementation of the new principals will align a company’s reporting more closely with best practices in their home country, allowing for enhanced transparency that will help investors and stakeholders better understand a business’s financial situation.
With mandatory compliance fast approaching, there is a limited amount of time for companies operating in India to prepare for Ind-AS implementation. Businesses should firstly develop an outline of how the new standards will replace existing ones, and then look to embed Ind-AS into their operational systems, train their financial teams, and ensure all company managers understand the new accounting principles.
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