[The following guest post is contributed by Arka Saha, who is a 4th Year B.A.LL.B. (Hons) & Executive Student in CS (ICSI) at National Law University Odisha (NLU-O)]
To bring about systemic convergence of financial reporting standards in vogue in the case of Indian banking companies, Insurance companies and Non-banking Financial Companies with those recognised and accepted globally, the Indian Government posited the roadmap for the adoption of Indian Accounting Standards (Ind As) by these companies on the 18 January 2016. As per the press release, scheduled commercial banks and insurance companies have to switch over to the Ind As, which are a set of accounting standards in concurrence with the International Financial Reporting Standards (IFRS) barring certain carve-outs, promulgated by the Ministry of Corporate Affairs, from the period commencing from 1 April 2018. The nature of these standards mandate a paradigm shift in the financial reporting process for these companies and its adoption is likely to have a drastic impact on the company's financial statements.
Prevalent Accounting Standards and the Need for Change
The Indian GAAP or the Generally Accepted Accounting Principles area collection of pronouncements by various regulatory authorities in India pertaining to the mode of recognition, measurement and disclosure of data in the books of accounts of companies.Section 211(3C) of the Companies Act, 1956, introduced by the Companies (Amendment) Act, 1999, mandated compliance with Accounting Standards that were recommended by the Indian Institute of Chartered Accountants of India (ICAI) and notified by the Central Government. These standards, were incorporated into legislation by the Companies (Accounting Standards) Rules, 2006 and made applicable to all companies vide Notification G.S.R. 739(E) dated 7 December 2006. In 2011, the Revised Schedule VI to the Companies Act, which contained a new format for the preparation and presentation of financial statements as required under section 211 of the Act, and framed as per the existing standards notified by the 2006 rules, was issued by the Ministry of Corporate Affairs. The coming into force of the Companies Act 2013 saw the same standards of reporting and similar format being retained in Schedule III under section 129.
The accounting standards issued by the ICAI were made applicable to banks by the sector regulator, the Reserve Bank of India, vide circulars and guidelines and to Insurance companies by the Insurance Regulatory and Development Authority (IRDA) vide IRDA (Preparation of Financial Statements and Auditor's Report of the Insurance Companies) Regulations 2002. Banking companies, have to prepare their accounts as per the format contained in the third schedule to the Banking Regulation Act, 1949. The requirements stipulated in Schedule VI (and subsequently Schedule III of the Companies Act 2013) relating to profit and loss account and the balance sheet of a company also apply to those of a banking company, unless inconsistent with the provisions of the Banking Regulation Act. In summary, all kinds of companies are mandated by law to follow GAAP as set out by the ICAI and modified by sector regulators. It is pertinent at this juncture, to note that the Indian GAAP, being discordant with the IFRS, which are a set of internationally recognised and accepted accounting standards promulgated by the International Accounting Standards Board (IASB), has resulted in the lack of comparability of Indian companies with their international counterparts across various jurisdictions.
Adoption of IFRS confers various advantages over the GAAP, such as cost saving by multinationals, increased comparability between companies world-wide, increased access to foreign capital markets in jurisdictions wherein IFRS is mandatory for listing, improved consistency and transparency, and so on. These advantages of adopting the IFRS were recognised by the ICAI in October 2007, with it issuing a concept paper on convergence of accounting standards with the IFRS. The concept paper mooted the idea of adoption of IFRS by public interest entities such as public listed companies, banking companies and insurance companies on or after the financial year commencing from 1 April 2011. India further reiterated its ambition to converge extant accounting standards with the IFRS at the G20 summit in Pittsburgh in 2009 and subsequently, the Ministry of Corporate Affairs released a roadmap ended towards the convergence of the prevailing accounting standards with IFRS for companies, not being banking companies, insurance companies and NBFCs, in 2010. The roadmap, posited two separate sets of standards under Section 211(3C) of the Companies Act: one, the standards newly converged with the IFRS, which would be applicable to certain classes of companies from dates specified in the roadmap called Ind As, and second, the extant accounting standards, which would be applicable to unlisted entities having a net worth of less than Rs. 500 crores or less, and small and medium companies.
In March 2010, the Ministry of Corporate Affairs issued a roadmap for the convergence of accounting standards for Banking Companies, Insurance Companies and NBFCs. The Ministry of Corporate Affairs, in 2011, placed 35 Ind ASs, converged with the IFRS on its website, but without an implementation date. Consequently, the companies covered under the initial roadmap of 2010 did not implement the same. The same accounting standards continued to be in force for companies with the enactment and subsequent notification of the Companies Act 2013.
Subsequently, four more Ind ASs were recommended by the ICAI. In 2015, these accounting standards were notified by the Ministry of Corporate Affairs under the Companies (Indian Accounting Standards) Rules 2015, under section 133 of the Companies Act, 2013. The rules laid down the roadmap pertaining to the adoption of Ind ASs by companies, but chose to leave out Banking companies, Insurance Companies and NBFCs outside its purview. The predominant reason for the late proposed adoption of Ind As by banks, insurance companies and NBFCs was the non finalisation of IFRS 9, pertaining to financial instruments, which was later issued by the IASB in July 2014.
The Recent Measures
The roadmap for implementation of Ind As by scheduled commercial banks and insurance companies notified vide a press release dated 18 January 2016 requires all scheduled commercial banks (barring Regional Rural Banks) , All-India Term Lending Refinancing institutions like EXIM Bank, NABARD, SIDBI and NHB, and insurance companies, to prepare Ind-As based financial statements for the financial year commencing 1 April 2018 with comparatives for periods ending 31 March 2018. Further, regardless of the requirement under the roadmap for Ind-As adoption by companies, the holding company, a Joint Venture Company, subsidiaries and associate companies of a scheduled commercial bank (excluding RRBs) will have to implement Ind-As and prepare financial statements based on these standards for accounting periods starting from 1 April 2018, with comparatives for periods ending 31 March 2018.
The implementation of Ind-As by NBFCs, as per the notification is to be carried out in two phases, with phase 1, including NBFCs with a net-worth of over Rs. 500 crores and their holding companies, subsidiaries, Joint Venture companies and associate companies, and commencing from the accounting period starting 1 April 2018, with comparatives for periods ending 31 March 2018. NBFCs covered under phase -II of implementation of Ind-As are those having a net-worth of more than 250 crores and less than 500 crores, NBFCs whose debt securities or equity is listed or is to be listed in a recognised stock exchange either in India or abroad having net worth of less than Rs. 500 crores. These NBFCs have to present Ind-As compliant financial statements from the accounting periods commencing 1 April 2019, with comaparatives for periods ending 31 March 2019. The requirement of implementation of Ind-As under this phase extends to holding companies of the NBFCs included in phase II, their subsidiaries, associate companies and Joint Venture companies. The press release further prohibits scheduled commercial banks, NBFCs and insurance companies who do not fall under the roadmap presented from adopting Ind-As voluntarily in order to encourage a structured and phased transition to the new standards. However, these companies are not prohibited from providing to their parent companies or investor companies Ind-As compliant financial statements, if such parent company is mandated under law to prepare consolidated financial statements compliant with Ind-As.
It is pertinent to note that for the companies covered in the roadmap, Ind-As is to be applicable to both individual and consolidated financial statements. The notification also specifically excludes Urban Cooperative Banks (UCBs) and Regional Rural banks (RRBs) from Ind-As implementation.
Effects of Transition
For a company moving from the GAAP to Ind-As, requirements of Ind-As 101 have to complied with, of which the primary requirement is the retrospective application of Ind-As, barring certain optional and mandatory exceptions to retrospective application. It is pertinent to note that adjustments arising from the initial application of Ind-As are to be adjusted against the opening retained earnings of the first period and is thus likely to negatively impact the retention ratio of implementing entities.
The earliest accounting period for which the entities included in the roadmap have to prepare Ind-As compliant financial statements is 1 April 2018. However, due to the requirement of having a comparable equivalent balance sheet, Ind-As compliant accounts have to be constructed from the period beginning 1 April 2017.The author is of the opinion that the requirement to prepare Ind-As compliant comparatives shall give the companies who have to prepare them mandatorily from 1 April 2017 very little time for the same, given the lack of skilled professionals conversant with the nitty-gritties of these converged accounting standards.
The gravest impact on Indian banks could be due to the adoption of Ind-As 109. In a time when banks in India are stressed due to the rising gross NPAs and weak assets, the adoption of Ind-As 109, which proposes a paradigm shift in the accounting model for impairment is tricky, to say the least. Indian banks traditionally, as per the extant international standard IAS 39, require loan loss provisions to be made upon the impairment taking place. This model has come to be widely criticised, and in pursuance of rectifying it, Ind-As 109, which is based on IFRS 9, adopts an “expected credit loss” framework. Under this framework, an entity is mandated to set its expected credit loss arising out of a financial asset on the basis of “reasonable and supportable information that is available without undue costs or effort. These include historical, current and forecast information. 
The adoption of Ind-As 109 thus gives rise to three separate conundrums, one pertaining to capital requirement, and the other pertaining to associated costs of implementation and the third one pertaining to lack of consistence and objectivity. The Expected Credit Loss Model, juxtaposed to the Incurred Credit Loss model currently being followed, by virtue of relying on notions of risk of default, will require higher provisioning for loss, which is an expense, thus affecting the opening balance of retained earnings, and capital. Pertaining to the second conundrum, it is pertinent to note that the Expected Credit Loss Model is “data intensive and necessitates fairly sophisticated credit modelling skills” raising costs of implementation.
Thirdly, Under the Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances (IRACP), which Indian banks have to mandatorily follow, provisioning requirements are based on an objective criteria, as opposed to the subjective criterion followed under Ind-As 109. Under the extant norms, provisioning requirements come into play as per the '90 day rule', whereas under Ind – As 109, provisioning is largely dependent on management judgement. Thus, the objectivity of an RBI mandated criteria and consistency among banks is lost with adoption of Ind As 109.
The author is of the opinion that the adoption of Ind-As, focused towards bringing accounting in India in convergence with global standards under the IFRS, is a welcome step in spite of all the transient issues plaguing first time adoption. It is pertinent to note that India has chosen to converge its accounting standards with the IFRS as against complete adoption, with certain carve-outs. The presence of these carve-outs however, will take away some benefits of converging with the IFRS, such as listing of securities in capital markets abroad, that require IFRS compliance. It will also be interesting to see how the adoption of Ind-As affects M&A activities of banks, with more NPAs now set to be provisioned for, a move ultimately reflecting poorly on the health of such banking companies.
- Arka Saha
 Roadmap drawn-up for implementation of Indian Accounting Standards (Ind AS) converged with International Financial Reporting Standards (IFRS) for Scheduled Commercial Banks (Excluding Rrbs), Insurers/Insurance Companies and Non-Banking Financial Companies (NBFC’s) , Press Information Bureau , Ministry of Corporate Affairs, Government of India, 18 January 2016 available at http://pib.nic.in/newsite/PrintRelease.aspx?relid=134578.
 IFRS are a set of standards, frameworks and interpretations required for the preparation of Financial Statements. The term used herein includes the International Accounting Standards issued by the International Accounting Standards Committee (IASC) – the predecessor to the International Accounting Standards Board (IASB) and all interpretations. Presently, the IFRS consists of International Accounting Standards, International Financial Reporting Standards, Standard Interpretations, and the International Financial Reporting Interpretations.
 General Circular No. 15/2013, available at http://www.mca.gov.in/Ministry/pdf/General_Circular_15_2013.pdf.pdf
 5.5.1, Indian Accounting Standard (Ind AS) 109, available at www.mca.gov.in/Ministry/pdf/INDAS109.pdf
 5.5.11, Indian Accounting Standard (Ind AS) 109
 Report of the Working Group on Implementation of Ind AS by Banks in India, Reserve Bank of India, 2015