First-Year Ind AS Adoption & Net Worth Assessment | Practical Insights for Companies and Auditors

Taxmann presents Practical Insights on Ind AS and SAs, a weekly series exclusively for Accounts and Audit Module subscribers of Taxmann.com, focusing on the practical application of Ind AS and Standards on Auditing through structured, issue-based analysis.

Each week features a focused topic with real-world illustrations. This week’s edition explores the challenges non-financial listed companies face in adopting Ind AS, focusing on issues like equity reconciliation, profit adjustments, policy alignment, and the application of new standards in the first year of adoption.

Introduction

The adoption of Indian Accounting Standards (Ind AS) in India marked a significant shift from the traditional Indian GAAP framework, aimed at aligning financial reporting with global best practices. To ensure a smooth transition, the implementation was carried out in phases, allowing companies, auditors, regulators, and stakeholders to gradually adjust to the new standards. This phased approach addressed key issues such as net worth thresholds, mandatory and voluntary adoption, interim and annual reporting requirements, and first-time adoption disclosures. The roadmap also emphasises transparency through reconciliations, detailed disclosures, and consistent application of accounting policies, ensuring that users of financial statements can clearly understand the impact of moving to Ind AS.

By providing insights on these key areas, this document aims to guide companies, auditors, and stakeholders in understanding the process, challenges, and compliance requirements associated with transitioning from Indian GAAP to Ind AS.

1. Phased Roadmap for the Implementation of Ind AS in India

The implementation of Indian Accounting Standards (Ind AS) in India was carried out in phases to ensure a smooth transition from the existing Indian GAAP. This phased approach allowed regulators, companies, auditors, and users of financial statements to progressively adapt to the new reporting framework.

In Phase I, the mandatory adoption of Ind AS became effective for accounting periods starting on or after 1st April 2016. This phase applies to companies whose equity or debt securities were listed on, or in the process of being listed on, any recognised stock exchange in India or internationally. It also applied to unlisted companies with a net worth of ₹500 crore or more. For these entities, the first Ind AS financial statements were to be prepared for the year ending 31st March 2017, with the date of transition being 1st April 2015.

Phase II began with accounting periods starting on or after 1st April 2017. Under this phase, the application of Ind AS became mandatory for all listed companies and companies in the process of listing, excluding those listed on the SME exchange, regardless of net worth. For unlisted companies, Ind AS applied to those with a net worth of ₹250 crore or more but less than ₹500 crore. Entities under this phase prepared their first Ind AS financial statements for the year ending 31st March 2018, with the transition date set as 1st April 2016.

This phased implementation ensured that the transition to Ind AS was gradual, providing time for necessary adjustments to be made by all involved parties.

Also See – Practical Insights on Ind ASs and SAs – An Overview of Transitioning Framework Under Ind AS 101

2. Determination and Computation of Net Worth for the Purpose of Ind AS Applicability

Net worth is defined under section 2(57) of the Companies Act, 2013. It represents the aggregate of paid-up share capital, all reserves created out of profits and securities premium account after deducting accumulated losses, deferred expenditure and miscellaneous expenditure not written off.

The purpose of this definition is to measure the real financial strength of the company based on capital and retained earnings.

While computing net worth for Ind AS applicability, certain items are specifically excluded because they do not represent realised financial capacity. These exclusions include revaluation reserves, write-back of depreciation and reserves created out of amalgamation.

Net worth for applicability purposes is computed strictly on the basis of standalone financial statements and not consolidated financial statements. The computation is carried out under the existing accounting framework applicable at that time, typically Indian GAAP, because the decision regarding applicability precedes the adoption of Ind AS. The practical challenges companies face in determining and maintaining Ind AS applicability based on net worth thresholds are as follows:

2.1 Whether a Subsequent Reduction in Net Worth Below ₹500 Crore Affects Ind AS Applicability Once Triggered?

If a company had a net worth of ₹500 crore or more as at 31 March 2014, the threshold condition is considered to have been met on that audited reporting date. Accordingly, Ind AS adoption becomes mandatory in accordance with the implementation phase prescribed for that category of companies.

Once this trigger is activated, the requirement to apply Ind AS continues in subsequent years. A later reduction in net worth below ₹500 crore does not reverse or invalidate the initial applicability.

2.2 Whether Projected or Anticipated Net Worth Affects Ind AS Threshold Determination?

If an unlisted company’s net worth reaches ₹250 crore or more as at 31 March of a financial year, Ind AS becomes mandatory from 1 April of the immediately following financial year.

The determining factor is the audited net worth as at the reporting date. Projections, expected growth, or anticipated reductions in net worth are not considered. Once the prescribed threshold is met on the audited balance sheet date, adoption of Ind AS becomes compulsory.

2.3 Should Capital Reserve Arising From a Government Grant Be Included in Net Worth for Determining Ind AS Applicability?

Where a company has received a government grant in the nature of promoter’s contribution and has recognised it as a capital reserve in accordance with AS 12, Government Grants a question arises whether such capital reserve should form part of net worth for the purpose of determining Ind AS applicability.

For this purpose, reference is made to the definition of “net worth” under the Companies Act, 2013, which includes paid-up share capital and all reserves created out of profits and securities premium, after deducting accumulated losses and certain specified items. The Act does not specifically exclude capital reserves arising from promoter contributions.

Accordingly, where a government grant is in substance a promoter’s contribution and has been credited to capital reserve, such reserve is generally considered as part of net worth for assessing Ind AS applicability, unless specifically excluded under the applicable legal provisions. The assessment must be aligned with the statutory definition and the substance of the transaction.

2.4 Whether Net Worth for Ind AS Applicability Is Computed Under Indian GAAP or Ind AS?

A common issue is whether net worth for assessing Ind AS applicability should be computed under Indian GAAP or under Ind AS. In practical terms, the evaluation is made based on the accounting framework currently followed by the company at the relevant reporting date. After determining whether the threshold criteria are met, the company then applies Ind AS from the prescribed date of adoption.

2.5 Determination of Ind AS Applicability for Companies in Existence as at 31 March 2014

A company that was in existence as at 31 March 2014 determines Ind AS applicability based on its net worth as on that date. If the prescribed threshold was met on that audited balance sheet date, Ind AS becomes applicable in accordance with the relevant phase of implementation.

2.6 Determination of Ind AS Applicability for Companies Not in Existence as at 31 March 2014

A company that was not in existence as at 31 March 2014 determines Ind AS applicability based on the first audited financial statements in which its net worth meets the prescribed threshold. Once the threshold is crossed on an audited reporting date, Ind AS becomes applicable from the immediately following financial year.

2.7. Does the Net Worth Reported in the First Audited Reporting Period Trigger Ind AS Applicability?

For companies preparing their first audited financial statements, the net worth reported in those statements is used to determine Ind AS applicability.

2.8. How Is Net Worth Determined for Ind AS Applicability When a Company Follows a Different Financial Year?

Where a company follows a financial year other than April–March, the relevant net worth for assessing Ind AS applicability is determined based on the audited financial statements for the financial year ending immediately before the reference date specified in the implementation roadmap.

For Example, If the roadmap specifies 31 March 2014 as the reference date and a company follows a January–December financial year, it will rely on its audited financial statements for the year ended 31 December 2013.

The net worth reported as at 31 December 2013 will be considered for determining whether the prescribed Ind AS threshold has been met.

2.9. Is Net Worth for Ind AS Applicability Tested Only Once?

Applicability of Ind AS is not a one-time assessment. Companies that do not meet the prescribed threshold initially are required to evaluate their net worth at every annual reporting date. Once the threshold is satisfied on any audited reporting date, Ind AS becomes applicable from the immediately succeeding financial year.

2.10. Does Ind AS Continue to Apply Even if Net Worth Subsequently Declines?

Once Ind AS becomes applicable to a company, the requirement continues even if its net worth subsequently declines below the prescribed threshold.

The framework operates on a “once triggered, always applicable” principle. A later reduction in net worth does not permit a return to Indian GAAP, unless a specific regulatory relaxation is granted and formally approved.

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