New from India accounting standard, Ind AS 115, has been in force since April 1, 2018, which marks the start of the country’s new financial year.
As explained by the Ministry of Corporate Affairs, the Ind AS 115 sets out the principles to be applied by an entity in order to communicate useful information to users of financial statements.
These principles include the nature, amount, timing and uncertainty of income and cash flows arising from a contract with a customer.
India-based companies will need to adopt a more detailed process for revenue recognition, as Ind AS 115 removes any possibility of interpretation in several areas. It only prescribes one underlying principle for revenue recognition, which is the transfer of control over goods or services. The new standard also replaces the concept of “fair value” by the “transaction price”, which, according to the Institute of Chartered Accountants of India (ICAI) – is better suited for measuring income.
The ICAI also stated that Ind AS 115 provides clarity in areas involving multi-element or bundled contracts, licensing, intellectual property royalties, financing components and variable consideration.
Experts believe that the new accounting standard will provide essential transparency in the accounting and auditing process by improving the information to be provided. This will impact a wide range of sectors in India including technology, real estate, mining and metals, engineering-procurement-construction and telecommunications, as the standard incorporates new concepts of revenue recognition.
In addition, the existing Ind AS 18 and 11 standards, which are used to review revenue and construction contracts, respectively, will be withdrawn as Ind AS 115 comes into effect.
Indian real estate appears to be among the most affected by the transition in accounting standards. From this exercise, listed real estate companies will have to switch to the project completion method from the existing percentage completion method (POC).
This means that payments from home buyers for the purchase of projects under construction will no longer be treated as revenue or profit on sales; rather, they will be considered as advances or loans.
Ind AS 115 conforms to international best practices and aligns with International Financial Reporting Standards (IFRS) defined globally by the International Accounting Standards Board and the IFRS Foundation.
However, the application of Indian accounting standards for the banking sector in India has been postponed by the Reserve Bank of India until April 1, 2019.
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