From Indian GAAP to Ind AS

Why the change?

The transition from Indian GAAP to Ind AS is a historic and a landmark change. In accordance with its
commitment to G20, India is converging to IFRS in a phased manner starting from annual periods
beginning on or after 1 April 2016. The IFRS converged standards will be known as Indian Accounting
Standards (Ind-AS) and will contain numerous carve outs from IFRS. The change to Ind AS is a hugely
positive move that will bring the accounting in India substantially closer to the accounting followed by
the global companies under IFRS.

Due to carve outs, Indian companies may not be able to make a dual statement of compliance with
both Ind AS and IASB IFRS. Therefore, Indian companies may not be able to use Ind AS financial
statements for global listing purposes that require compliance with IFRS. However, Indian companies
may find it easier to prepare IFRS financial statements from Ind AS financial statements rather than
Indian GAAP financial statements.

The application of Ind AS is more than a mere accounting or technical exercise. The consequences are
far wider than financial reporting issues, and extend to various significant business and regulatory
matters including debt covenants, dividend, managerial remuneration, ESOP, minimum alternate tax
(MAT), training of employees, IT systems, internal control and taxation.

What are the changes?

The impact of Ind AS adoption can be observed across various accounting areas. Presented below is
the percentage impact of certain key accounting areas in the reported net income for the quarter
ended 30 June 2015 under Ind AS vis--vis previous Indian GAAP.

Source: PwC Ind AS impact analysis

Revenue Recognition: Some of the key differences between AS and Ind AS in terms of revenue
recognition areas are as following:

Indian GAAP recognises the revenue at the contractual amount of consideration. Whereas, Ind-
AS measures revenue at the fair value of the consideration.
Under Indian GAAP, cash discount and certain schemes are reported as expenditure in financial
statements. Whereas, under IND AS 18, rebates, discounts, schemes cost will be reduced from
revenue when sale is recognized.
AS 9 requires the recognition of revenue from interest on time proportion basis as per contractual
terms. IND AS 18 requires interest to be recognised using the effective interest method as set out
in Ind AS 109.
Revenue from rendering of services: As per AS 9 revenue is recognised using either by completed
services or proportionate completion method. As per IND AS 18, revenue is recognised in the
period in which services would be rendered, generally under percentage completion method.

Property, Plant and Equipment: Following are some of the key differences between AS and Ind AS:

Eligible borrowing costs (debt vs equity, standalone vs consolidated)

Accounting for stores and spares
Asset retirement obligation (to consider time value of money)
Deferred credit arrangements for purchases of PPE
Indefinite useful lives for certain intangibles
Restriction on revenue based amortisation

Also, while the current requirements of AS are similar to those of Ind AS, the treatment applied in past
periods had significant differences from the requirements of Ind AS. For example, application of
minimum rates prescribed for depreciation, no specific requirement for compensation, accounting for
preoperative expenditure, etc.

Financial instruments: While AS 13, Accounting for Investments (AS 13) is an authoritative guidance
on financial instruments, Ind AS 109, Financial Instruments provides a much more comprehensive,
detailed and in certain cases complex guidance for accounting for financial instruments. Some of the
key areas of differences between AS and Ind AS are as follows:

Classification and measurement of financial assets (including fair value measurement of equity
shares, mutual funds, etc.)
Measurement of derivatives at their respective fair values instead of providing only for losses
based on principles of prudence
Measurement of borrowings at amortised cost with reference to the effective rate of interest
Classification of redeemable preference shares as debt and specific guidelines for classification in
case of convertible issued by the reporting entity
Impairment of financial assets including trade receivables, etc based on the expected loss model
 Recognition of financial instruments at fair value e.g. interest free loans to subsidiaries, interest
free security deposits.

Foreign exchange fluctuation: Some of the key differences between AS and Ind AS in relation to
foreign exchange fluctuation are as follows:

No separate concept of functional currency and reporting currency under AS. Accordingly, under
Ind AS, an assessment of functional currency based on the indicators specified in the standard is
required.
Under AS, companies had an option to capitalise foreign exchange differences on long-tern
monetary items, or to accumulate them in reserves and subsequently amortise them into the
statement of profit and loss over the remaining tenure of the related monetary item. All other
foreign exchange differences were required to be recognised in the statement of profit and loss.

Employee benefits: For the purpose, share-based payments have also been covered as part of
employee benefits. Key differences between AS and Ind AS in relation to employee benefits and share-
based payments:

Remeasurements (including actuarial gains/losses) to be recognised in Other Comprehensive

Income (OCI) under Ind AS compared to the requirements of AS where the entire impact of
the actuarial valuation was to be recognised in the income statement of profit and loss.
Share-based payments are required to be measured with reference to their fair value unlike
in AS where companies had an accounting policy to measure the same at either intrinsic value
or fair value.
In case where the options have a graded vesting feature, each tranche is required to be
treated as a separate grant and amortised over the respective period.

Business combinations: While under AS there is no comprehensive guidance for accounting for
business combinations e.g. Consolidated Financial Statements (AS 21) for acquisition of subsidiaries,
Accounting for Amalgamations (AS 14) for amalgamation, etc. all business combinations under Ind
AS are required to be accounted for as per the requirements of Ind AS 103 Business Combinations.
Some of the key Ind AS requirements include:

Acquisition date when control is transferred not just a date mandated by court or agreement
Mandatory use of purchase method of accounting fair valuation of net assets (including
previously unrecognised intangible assets) and subsequent fair value based amortisation
Fair value of consideration transferred (earn-out arrangement, deferred and contingent
consideration accounting on acquisition date)
Transaction costs charged to the statement of profit and loss
Goodwill amortisation not permitted
Demerger at fair value, in certain instances
 Participative rights held by non-controlling interest could result in classification of investee as
joint venture even in cases where the reporting entity has majority voting rights
Recognition of liability for put options written in favour of non-controlling interests
Equity method of accounting for joint ventures.

An analysis of 75 companies across various industry sectors gave the following result:
Other than pharmaceuticals, life sciences and healthcare, industrial manufacturing and
automotive sectors, all the sectors have reported an average decrease in net income. Metals,
telecom and capital projects and infrastructure sectors have reported the maximum average
decrease in net income upon Ind AS adoption.

Source: PwC Ind AS impact analysis