Updated : August 28, 2024How Indian Companies Will Benefit From New Accounting Standards Ind-AS
Overview :Post implementation of the new Indian Accounting Standard (Ind-AS), a considerable impact of the transition has been observed in the computation of revenue, net profit, operating profit and even in the net worth of the listed companies. Several sectors may be benefitted from this new accounting standard, while few sectors might witness significant downfall in their revenues.
After the implementation of the new Indian Accounting Standard (Ind-AS), TATA Steel, Maruti Suzuki, Ultra Tech, BPCL, and Coal India may report a 3-12% increase in earnings. However, on the contrary, earnings of ITC, Lupin, Bharti Infratel, and Arvind may fall by 4-10%. Whereas the new standards will be adopted by the companies each with the net worth of Rs 500 crore or more in FY17.
The considerable impact of the transition would be observed in the computation of revenue, net profit, operating profit and net worth of the listed companies. The sectors that are likely to be impacted most include telecoms, metals, oil & gas and real estate. As per the estimates drawn by the analyst, it is most likely that the overall EBITDA may drop by 2-3% while the revenues will increase by 4-5% by the introduction of new norms.
The Ministry of Corporate Affairs (MCA) had come up with the Companies Indian Accounting Standards (IND AS) Rules 2015 which laid down the adoption and applicability of IND AS in a structured manner, beginning from the Accounting period 2016-17. However, since then, it has issued three Amendment Rules (each in 2016, 2017 & 2018) to make amendments in 2015 accounting rules.
The New Standards
“Every country stipulates a method for companies to report financial data based on rules called accounting standards.” India has so far been following Indian Generally Acceptable Accounting Principle (IGAAP). However, it will be following Ind-AS from FY17, whose principles are closely based on the international accounting system called IFRS. This will bring Indian companies at par with their international counterparts.
Fundamental difference between existing and new standards
“The new accounting standards recognize substance over form and importance of the fair value to compute financial statements” This implies that just complying with legal provisions will not suffice as accurate reporting will gain importance over it which should reflect the most current picture of financials.
Impact on companies
It will impact the way the key financials such as revenue, net profit, book value, operating profit, goodwill, and return on equity will be computed. For instance, under the existing rules, in order to calculate sales excise duty is deducted from it. However, as per the new norms, excise duty will be treated as a tax on manufacturing activity. Therefore, it should be a part of revenue. This will increase the revenue of companies but depress operating margin. However, EPS will remain unchanged.
Conclusion
The new accounting standards (Ind-AS) recognize substance over form and importance of the fair value to compute financial statements. It will significantly impact the way how the key financials of a company will be computed. As a result, it may also increase the earnings of some companies. In contrast, some other companies may notice a sharp fall in their earnings. Go through the above blog to gain thorough understanding!
