Indian financial reporting standards

In India, the state of financial reporting has changed dramatically in the previous five years. As trade expands beyond national borders, compliance and reporting standards must adapt as well. The reporting standards ensure that the transactions are reported by the firms similarly. However, standards must remain flexible and allow discretion to management to properly describe the economies of scale. This post is designed to alert investors about the major differences between IFRS, US GAAP, Ind AS, and Indian GAAP.

The standard-setting body IASB i.e International Accounting Standards Boards has established International Financial Reporting Standards (IFRS). IFRS Standards are required in more than 140 jurisdictions and permitted in many parts of the world. In the United States, Financial Accounting Standards Board (FASB) set forth Generally Accepted Accounting Principles (GAAP) which is generally referred to as US GAAP.

India has adopted the Indian accounting standards (Ind AS) that are based on and substantially converged with IFRS. India used to follow Indian GAAP prior to Ind AS. The companies not covered under Ind AS roadmap shall continue to apply existing Indian GAAP, however, they can voluntarily adopt Ind AS. Once Ind AS is applied, an entity cannot switch back to Indian GAAP.

Balance sheet

Non-financial assets

The differences for long-lived assets could result in earlier impairment recognition under IFRS/Ind AS and Indian GAAP as compared to US GAAP.

The tangible assets are property, plant, and equipment (PP&E). PP&E can be reported using either the cost model or the revaluation model under IFRS/Ind AS and Indian GAAP, however only the cost model is acceptable under US GAAP. Also under the cost model, PP&E has tested for impairment, if impaired, the asset is written down and loss is recognized in the income statement. Under IFRS/Ind AS and Indian GAAP, loss recoveries are permitted, but not under US GAAP.

According to the IFRS, investment property includes assets that generate rental income or capital appreciation; however, there is no explicit definition of investment property under US GAAP. Under IFRS, a property can be reported at amortized cost or fair value, with the change in fair value reflected in the statement of comprehensive income, but under Ind AS and Indian GAAP, an investment property is reported using the cost model.

Financial Assets

Financial assets include investment securities, derivatives, loans, and receivables.

IFRS	US GAAP	Ind AS	Indian GAAP
Currently, as per IAS 39, financial assets are measured at either of the following categories•Held-to-maturity•Loans and receivables•Available for sale•Fair value through profit or loss.Held-to-maturity assets are carried at amortized cost and tested for impairment. Loans and receivables are measured at amortized cost. Available for sale financial assets are measured at fair value through other comprehensive income and the residual category is measured at fair value through profit or loss. The unlisted equity instruments are measured at fair value (with rare exceptions only for instances in which fair value cannot be reliably measured)	At acquisition, an entity shall classify debt and marketable equity securities into either of the following categories:•Trading securities•Available for sale securities•Held to maturityTrading securities are measured at fair value and unrealized holding gains and losses are recognized in the income statements. The available for sale securities are measured similarly to IFRS. Held-to-maturity debt securities are carried at amortized cost.The classification of a loan generally depends on whether the loan meets the definition of debt security under ASC 320.	Ind AS 109 has two measurement categories: amortized cost and fair value. Movements in fair value are presented in either profit or loss or other comprehensive income (OCI) subject to certain criteria being met.To determine which measurement category a financial asset falls into, entities should first consider whether the financial asset is an investment in an equity instrument or a debt instrument.Ind AS 109 now provides three categories for classifying debt instruments-amortized cost, fair value through othercomprehensive income (‘FVOCI’), and fair value through profit or loss (‘FVPL’). Ind AS 109 specifically provides an option to irrevocable designate an investment in an equity instrument at fair value through other comprehensive income. Such gains or losses cannot be reclassified to profit or loss even on disposal of the instrument.	Investments are classified as long-term investments and current investments.The carrying amount for current investments is lower of cost and fair value. Long-term investments are carried at cost less provision for diminution to recognize a decline, other than temporary, in the value of the investments, if any.If an investment is acquired, or partly acquired, by the issue of shares or other securities, the acquisition cost is the fair value of the securities issued Similarly, if an investment is acquired in exchange, or part exchange, for another asset, the acquisition cost of the investment is determined by reference to the fair value of the asset given up. It may be appropriate to considerthe fair value of the investment acquired if it is more clearly evident.All other financial assets are recognized at transaction value.

Lease

IFRS/Ind AS and Indian GAAP provide criteria for lease classification that are similar to US GAAP criteria. However, the IFRS/Ind AS and Indian GAAP criteria do not override the basic principle that classification is based on whether the lease transfers substantially all of the risks and rewards of ownership to the lessee. This could result in varying lease classifications for similar leases under the two frameworks. Other key differences involve areas such as sale-leaseback accounting, build-to-suit leases, leveraged leases, and real estate transactions.

Current Assets

Inventory

The firm must choose a cost flow technique to allocate inventory costs to an income statement, with the sole distinction being that the LIFO (last-in, first-out) approach is acceptable under US GAAP but not under IFRS, resulting in differing operating results and cash flow under IFRS/Ind AS and Indian GAAP. Under IFRS, inventory is measured at the lower of cost or net realizable value; if the inventory is written down, the inventory can be written up on subsequent recoveries, and the gain can be recognized in the income statement. However, in US GAAP companies that use the LIFO method, inventory is reported on the balance sheet at the lower of cost or market, and if the inventory value recovers after being written down, it is not allowed to be written up under US GAAP, which applies to all companies that use any cost flow method.

Liability

The guidance in relation to nonfinancial liabilities (e.g., provisions, contingencies, and government grants) includes some fundamental differences with potentially significant implications.
For instance, a difference exists in the interpretation of the term “probable”. IFRS/Ind AS defines probable as “more likely than not”, but US GAAP defines probable as “likely to occur”. Because both frameworks reference probable within the liability recognition criteria, this difference could lead companies to record provisions earlier under IFRS/Ind AS than they otherwise would have under US GAAP. The use of the midpoint of a range when several outcomes are equally likely (rather than the low-point estimate, as used in US GAAP) might also lead to higher expense recognition under IFRS/Ind AS.

Income Statements

Under IFRS, the income statement can be combined with Other Comprehensive income and presented as a single statement of comprehensive income. Alternatively, the Income statement and the statement of other comprehensive income can be presented separately. The US GAAP is the same as IFRS. The Ind AS follows the single statement approach where it makes a single statement of profit or loss and other comprehensive income. There is no such concept of other comprehensive income under Indian GAAP. The most significant difference between the frameworks is that under IFRS an entity can present expenses based on their nature or their function whereas Ind AS only allows the classification of expense by nature.

Revenue recognition

Sale of goods

IFRS	US GAAP	Ind AS	Indian GAAP
Revenue is recognized from the sale of goods when:The risk and reward of ownership is transferred.No continuing control over the goods soldRevenue can be reliably measuredThe probable flow of economic benefitsCost can be reliably measured.	Revenue is recognized when:Realized or realizableearned.The SEC also adds that revenue related to contingent consideration should not be recognized until the contingency is resolved. It would not be appropriate to recognize revenue based upon the probability of a factor being achieved.	Similar to IFRS	For the sale of goods, the general recognition criteria are as follows:• The entity has transferred to the buyer the significant risks and rewards of ownership;• The entity retains no effective control over the goods sold to a degree usually associated with ownership;• The revenue is measurable at the time of sale; and• It is not unreasonable to expect the ultimate collection.

Sale of services

IFRS	US GAAP	Ind AS	Indian GAAP
IFRS requires that service transactions be accounted for by reference to the stage of completion of the transaction (the percentage-of-completion method). When the outcome of a service transaction cannot be measured reliably, revenue may be recognized to the extent of recoverable expenses incurred where the Zero profit model is used.	US GAAP prohibits the use of the cost-to-cost revenue recognition method for service arrangements unless the contract is within the scope of specific guidance for construction or certain production-type contracts.	Similar to IFRS.	Revenue from service transactions is usually recognized as the service is performed, either by the proportionate completion method or completed servicecontract method. Indian GAAP does not prescribe the use of the zero cost model for revenue recognition purposes.

Long term contracts

Percentage of completion method: Revenue is recognized in the proportion of the cost incurred. It is used when the cost can be reliably estimated. It is followed by all of the reporting standards. But when the cost cannot be reliably estimated, the completed contract method can be used as per US GAAP only. Where the revenue is recognized only when the contract is complete. Other standards do not allow the use of the completed contract method but they apply the zero-profit method (wherein revenue is recognized to the extent of costs incurred if those costs are expected to be recovered).

The converged accounting standards by FASB/IASB revenue recognition standard:

The standard sets forth a five-step model for recognizing revenue from contracts with customers:
• Identify the contract with a customer.
• Identify the performance obligations in the contract.
• Determine the transaction price.
• Allocate the transaction price to the performance obligations.
• Recognize revenue when (or as) each performance obligation is satisfied.

Expense Recognition

Share-based payments

Although the US GAAP and IFRS/Ind AS guidance in this area is similar at a conceptual level, significant differences exist at the detailed application level.
Under IFRS/Ind AS, companies apply a single standard to all share-based payment arrangements, regardless of whether the counterparty is an employee or a nonemployee. Under US GAAP, there is a separate standard for nonemployee awards. Under Indian GAAP, there is no equivalent accounting standard on share-based payments. However, the ICAI has issued a Guidance Note on Accounting for Employee Share-Based Payments.

Employee stock purchase plans (ESPP)

ESPPs generally will be deemed compensatory more often under IFRS/Ind AS/Indian GAAP than under US GAAP. Under the US GAAP ESPPs are compensatory if terms of the plan:
•Either (1) are more favorable than those available to all shareholders, or (2) include a discount from the market price that exceeds the percentage of stock issuance costs avoided;
•Do not allow all eligible employees to participate on an equitable basis; or
•Include any optional features.

Income tax effects

The deferred income tax accounting requirements for share-based payments under IFRS/Ind AS vary significantly from US GAAP. Companies can expect to experience greater period-to-period variability in their effective tax rate due to share-based payment awards under IFRS/Ind AS. The extent of variability is linked to the movement of the issuing company’s stock price. For example, as a company’s stock price increases, a greater income statement tax benefit will occur, to a point, under IFRS/Ind AS. Once a benefit has been recorded, subsequent decreases to a company’s stock price may increase income tax expense within certain limits.

Employee benefits:

Employee benefits are all forms of consideration given by an entity in exchange for service
rendered by employees or for the termination of employment.
Differences between US GAAP and IFRS/Ind AS also can result in different classifications of a plan as a defined benefit or a defined contribution plan. It is possible that a beneficial arrangement that is classified as a defined benefit plan under US GAAP may be classified as a defined contribution plan under IFRS/Ind AS and vice versa. Classification differences would result in changes to the expense recognition model as well as to the balance sheet presentation. The classification of a plan under Indian GAAP is expected to be similar to IFRS/Ind AS.

Gains and losses (Employee benefits)

Under IFRS/Ind AS, remeasurement effects of net defined benefit liability (asset) are recognized immediately in other comprehensive income and are not subsequently recorded within profit or loss and the delayed recognition of gains and losses is prohibited, while US GAAP permits delayed recognition of gains and losses, with ultimate recognition in profit or loss. Under Indian GAAP, gains and losses are recognized immediately in the statement of profit and loss.

Statement of Cash flows

Differences exist between the frameworks for the presentation of the statement of cash flows that could result in differences in the actual amount shown
as cash and cash equivalents in the statement of cash flows as well as changes to each of the operating, investing, and financing sections of the statement of cash flows.

Under all the standards the cash flow statements can be presented using either direct method or indirect method the only difference is in India as per the SEBI regulations, 2015 the listed companies are required to use only indirect method.

The bank overdrafts repayable on demand are included in the cash and cash equivalents under IFRS and Ind AS whereas the changes in the balances of bank overdrafts are classified as financing cash flows under US GAAP and Indian GAAP. As per IFRS/Ind AS only the expenditures which result in recognized assets are eligible for the classification of investing activities whereas there is no such requirement under US GAAP and Indian GAAP.

In financial institutions, the interest and dividend received are to be classified as operating or investing activity as per IFRS/Ind AS, and as operating under US GAAP and Indian GAAP. Interest paid is classified under operating or financing activity as per IFRS/Ind AS whereas it is classified as operating activity under US GAAP and Indian GAAP. The dividend paid is is to be classified as operating or financing activity as per IFRS but under other standards, the dividend paid is classified as a financing activity. IFRS and US GAAP don’t have different rules for financial and non-financial institutions but the Ind AS and Indian GAAP do have which include the interest and dividend paid is to be classified under financing activity and interest and dividend received are classified as investing activity.

For the taxes paid the only difference that exists is under IFRS the income taxes are reported as operating activity unless the expense is associated with and investing or financing transactions whereas under US GAAP the taxes paid are reported under operating activity.

Statement of changes in equity

It reports the amounts and sources of changes in equity investor’s investment in the firm over the period of time. IFRS/Ind AS requires a statement of changes in equity to be presented as a primary statement for all entities whereas in US GAAP it can be presented as a primary statement or in the notes to the financial statements and in Indian GAAP it is not required to be presented as a primary statement.

Events after the reporting period

If non-adjusting events after the reporting period are material, non-disclosure could influence the economic decisions that users make on the basis of the financial statements. The disclosure requirements vary under Indian GAAP as compared to other frameworks. Under IFRS the entity shall disclose the following for each material category of non-adjusting event:
The nature of the event
an estimate of its financial effect, or a statement that such an estimate cannot be made.
Whereas under Indian GAAP when the event doesn’t affect the figures of the financial statements would not normally require disclosure although they may be of such significance that they may require disclosure in the report of the approving authority to enable users to make proper evaluations.

Capital management disclosures

Entities applying IFRS/Ind AS are required to disclose information that will enable users of its financial statements to evaluate the entity’s objectives, policies, and processes for managing capital.

IFRS	US GAAP	Ind AS	Indian GAAP
Entities are required to disclose the following:•Qualitative information about their objectives, policies, and processes for managing capital •Summary quantitative data about what they manage as capital•Changes in the above from the previous period•Whether during the period they complied with any externally imposed capital requirements to which they are subject and, if not, the consequences of such non-complianceThe above disclosure should be based on information provided internally to key management personnel.	There are no specific requirements of capital management disclosures under US GAAP.For SEC registrants, disclosure of capital resources is normally made in the Management’s Discussion and Analysis section of Form 10-K.	Similar to IFRS.	No such disclosure requirement.

The following link mentioned below is a very detailed view on the differences between the reporting frameworks used across the globe and in India:
https://www.pwc.in/publications/2017/ifrs-us-gaap-ind-as-and-indian-gaap-similarities-and-differences.html

Analysts will have to interpret financial accounts prepared according to various standards. As financial reporting standards evolve, analysts must keep track of how these changes may impact the financial statements they use. An analyst must be aware of new financial market products and innovations that result in new sorts of transactions.

Finally, analysts must keep an eye out for key accounting standards and estimations in company disclosures.

References:
IFRS, US GAAP, Ind AS, and Indian GAAP similarities and differences – PWC India – https://www.pwc.in/publications/2017/ifrs-us-gaap-ind-as-and-indian-gaap-similarities-and-differences.html
Indian GAAP, IFRS, and Ind AS A Comparison – Deloitte – https://www2.deloitte.com/content/dam/Deloitte/in/Documents/audit/in-audit-indian-gaap-ifrs-and-indas-a-comparison-noexp.pdf
Financial Reporting Standards – CFA Level 1 schweser notes