Ind AS Applicability Across Group Structures | Structural Changes | Non-Company Entities

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 practical challenges non-financial listed companies face while implementing Ind AS across various group structures and entity forms.

Introduction

The applicability of Indian Accounting Standards (Ind AS) under the Companies (Indian Accounting Standards) Rules, 2015 is not confined merely to companies that independently satisfy the prescribed listing or net worth thresholds. The notified roadmap adopts a relationship-based approach, extending the requirement to holding, subsidiary, associate and joint venture companies in order to ensure consistency in financial reporting and facilitate preparation of consolidated financial statements.

In practice, this framework gives rise to several interpretational issues. Questions commonly arise regarding the treatment of indirect or step-down subsidiaries, fellow subsidiaries, investor companies, foreign subsidiaries, branch offices, newly acquired or divested entities, and non-company structures such as LLPs and partnership firms. Further, clarity is often required on the cascading effect of voluntary adoption and the position after cessation of group relationships.

This document examines these practical issues in a structured manner, analysing the scope and boundaries of the Ind AS roadmap with reference to the statutory rules, relevant definitions under Ind AS, and interpretative guidance. The objective is to provide clarity on how Ind AS applicability operates across different group structures and entity forms, and to illustrate the principles through practical scenarios.

1. Structural Changes Impacting Ind AS Applicability Across Group Entities and Foreign Operations

This section examines how Ind AS applicability operates in special situations involving foreign entities, structural changes, delisting events, and shifts in group relationships.

1.1 Applicability of Ind AS to Foreign Subsidiaries, Associates, Joint Ventures, and Branch Offices

The applicability of Indian Accounting Standards (Ind AS) to various entities such as foreign subsidiaries, associates, joint ventures, and branch offices is specified in the roadmap for convergence to Ind AS. As per the rules, any Indian company that is a subsidiary, associate, joint venture, or similar entity of a foreign company must prepare its financial statements in accordance with Ind AS, provided it meets the applicability criteria.

The relevant question arises whether an Indian company, which has a foreign subsidiary, associate, or joint venture, is required to prepare consolidated financial statements as per Ind AS. Similarly, whether a foreign company that is a subsidiary, associate, or joint venture of an Indian company is required to prepare Ind AS financial statements.

The analysis indicates that the Indian company is not required to prepare consolidated financial statements or SFS as per Ind AS for foreign subsidiaries or joint ventures unless those entities themselves meet the applicability criteria for Ind AS. For instance, an Indian company with a foreign subsidiary that meets the net worth threshold will be required to prepare its financial statements as per Ind AS, whereas the foreign subsidiary does not need to follow Ind AS unless it is explicitly mandated by the criteria outlined.

Further, the applicability of Ind AS to branch offices is clarified in the roadmap. A branch office of a foreign company established in India is not required to comply with Ind AS if it does not meet the threshold for applicability. The branch office is simply an extension of the foreign company in India and is not considered a separate entity. Therefore, the branch office is not covered under the rule for compliance with Ind AS unless specifically mandated.

In summary, the applicability of Ind AS is determined by the Indian company’s financial structure and the net worth of foreign subsidiaries or branch offices, with adherence to prescribed criteria.

1.2 Applicability of Ind AS After Cessation of Subsidiary Relationship

Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015 prescribes the classes of companies required to comply with Ind AS based on listing status and net worth thresholds. The requirement also extends to holding, subsidiary, joint venture and associate companies of such entities.

Further, Rule 4 provides that once a company starts applying Ind AS, whether voluntarily or mandatorily, it shall be required to follow Ind AS for all subsequent financial statements, even if any of the criteria specified in Rule 4 no longer apply to it.

For Example, a company was a subsidiary of another company that satisfied the prescribed net worth criteria as on the relevant reference date. As a result, Ind AS became applicable to the parent company from the notified date and, by virtue of the parent–subsidiary relationship, also became applicable to the subsidiary from the same date. Accordingly, the subsidiary adopted Ind AS in compliance with the roadmap.

Subsequently, the subsidiary ceases to be a subsidiary of the parent company, for instance due to sale of shares or restructuring of ownership. The question then arises whether the company can revert to Accounting Standards (AS) notified under the Companies (Accounting Standards) Rules, 2006.

In this situation, the subsidiary was originally covered under the roadmap because of its relationship with the parent at the time Ind AS became applicable. Once it adopted Ind AS, Rule 4 requires that it continue to comply with Ind AS in all subsequent financial statements. Therefore, even after it ceases to be a subsidiary, it is not permitted to revert to the earlier Accounting Standards framework. Ind AS compliance must continue in future periods.

Thus, where a company has adopted Ind AS (mandatorily or voluntarily), it must continue to apply Ind AS in all subsequent accounting periods, even if it later ceases to be a subsidiary (or otherwise ceases to meet the original applicability criteria).

1.3 Application of Ind AS to a Newly Classified Subsidiary, Associate or Joint Venture

Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015 provides that Ind AS shall apply not only to companies meeting the prescribed listing or net worth criteria, but also to their holding, subsidiary, joint venture and associate companies.

Accordingly, where a company becomes a subsidiary, associate or joint venture of a company already covered under Ind AS, the requirement to apply Ind AS extends to such company by virtue of the relationship.

For Example, During the financial year, a listed company that is already required to comply with Ind AS acquires more than 50% of the equity shares of another company, thereby making that company its subsidiary. Prior to this acquisition, this subsidiary company (hereinafter referred to as “the company”) was not covered under the Ind AS roadmap.

From the date the subsidiary relationship is established, the company comes within the scope of Rule 4, as it becomes a subsidiary of a company to which Ind AS is mandatorily applicable. Consequently, it is required to prepare its financial statements in accordance with Ind AS from the accounting period in which it becomes a subsidiary. Ind AS would apply for the entire financial year in which the relationship is created, along with presentation of comparative information in accordance with Ind AS 101, First-time Adoption of Indian Accounting Standards.

However, if the subsidiary relationship is established after the end of the financial year but before the approval of the financial statements, Ind AS would not apply for that completed financial year. In such a case, the requirement to comply with Ind AS would arise from the following financial year.

Thus, a company that newly becomes a subsidiary, associate or joint venture of an Ind AS-compliant company is required to adopt Ind AS from the relevant financial year in which such status is obtained.

1.4 Applicability of Ind AS to a Company Which is Delisted Before the Mandatory Adoption Phase

Under the Companies (Indian Accounting Standards) Rules, 2015, the requirement to apply Ind AS is determined with reference to a company’s listing status and net worth as on the specified reference date (initially 31 March 2014). If the prescribed threshold was not met on that date, the assessment is required to be made on subsequent balance sheet dates.

Under the implementation roadmap, Ind AS was first made mandatory for listed companies (other than those listed on SME exchanges) and for certain unlisted companies meeting the higher net worth threshold. In the next stage, it was extended to unlisted companies having a net worth of ₹250 crore or more but less than ₹500 crore.

In a situation where a company is delisted before the effective date from which Ind AS becomes mandatorily applicable to listed companies, its applicability is assessed in the capacity of an unlisted company. Accordingly, if it meets the prescribed net worth threshold as on the relevant reference date, Ind AS would become applicable to it from the financial year specified under the corresponding phase of the roadmap.

1.5 Non-applicability of Ind AS to Indian Branch Offices of Foreign Entities

The applicability of Ind AS under the Companies (Indian Accounting Standards) Rules, 2015 is confined to specified classes of companies as defined under the Companies Act, 2013. The starting point for determining applicability is the definition of a “company” under section 2(20) of the Companies Act, 2013, which refers to a company incorporated under the Act or under any previous company law. Thus, Ind AS applies only to entities that are incorporated as companies in India.

An Indian branch office of a foreign entity, such as a US LLC, is not incorporated under the Companies Act, 2013. It is merely an extension of the foreign entity operating in India and does not constitute a separate company under Indian company law.

Accordingly, even if the branch has net assets exceeding ₹250 crore, is subject to Indian taxation, and is regulated by the Reserve Bank of India, it is not required to adopt Ind AS. Since it is not a “company” within the meaning of the Companies Act, 2013, it falls outside the scope of the Ind AS roadmap.

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