India’s New Accounting Standard ‘Ind AS 115’ Effective April 1, 2018

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India’s new accounting standard, Ind AS 115, is in effect from April 1, 2018, which is the start of the country’s new financial year. 

As explained by the Ministry of Corporate Affairs, the Ind AS 115 lays down the principles to be applied by an entity in order to report useful information to users of financial statements.

These principles include the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.

Companies based in India will need to adopt a more detailed process for revenue recognition as the Ind AS 115 removes scope for interpretation in several areas. It prescribes only one underlying principle for revenue recognition, which is the transfer of control over goods or services. The new standard also replaces the ‘fair value’ concept with ‘transactions price’, which according to the Institute of Chartered Accountants of India (ICAI) – is better suited for the measurement of revenue.

The ICAI also stated that the Ind AS 115 offers clarity in areas involving multiple element contracts or bundled products, licensing, royalties for intellectual properties, financing components, and variable consideration.

Experts believe the new accounting standard will bring in much needed transparency in the accounting and audit process by improving disclosures. This will impact a broad range of sectors in India, including technology, real estate, mining and metals, engineering-procurement-construction, and telecom as the standard incorporates new concepts of revenue recognition.

Further, the existing standards Ind AS 18 and 11, which are used to examine revenue and construction contracts, respectively – will be withdrawn as the Ind AS 115 comes into effect.

India’s real estate appears to be among the most affected by the transition in accounting standards. From this financial year on, listed real estate firms will need to switch to the Project Completion Method from the existing Percentage Completion Method (POC).

This means that home buyer payments toward the purchase of under construction projects will no longer be treated as turnover or profit from sales; rather they will be examined as advances or loans.

The Ind AS 115 is in keeping with international best practices, and aligns with the International Financial Reporting Standards (IFRS) set globally by the International Accounting Standards Board and the IFRS Foundation.

However, application of the Indian Accounting Standards for the banking sector in India has been deferred by the Reserve Bank of India to April 1, 2019.

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