Amendments in Ind AS and their Impact on Financial Statements for the year ended 31st March 2025
The financial reporting landscape in India continues to evolve with amendments to Indian Accounting Standards (Ind AS). For the financial year ended 31st March 2025, several key changes in Ind AS are expected to impact financial statements significantly. This article delves into the amendments to Ind AS 117, Ind AS 116, Ind AS 1 and other important issues covering accounting for payments received from suppliers, and contingent payments in acquisitions.
Ind AS 117: Insurance Contracts for Non-Insurance Entities
Background
Ind AS 117, notified by the Ministry of Corporate Affairs (MCA) on 12th August 2024, replaces Ind AS 104 and is effective for annual reporting periods starting on or after 1st April 2024. While insurance companies have been granted relief from immediate implementation, non-insurance entities issuing contracts with insurance-like features must comply with Ind AS 117.
Key Provisions
- Definition of Insurance Contracts: An insurance contract is defined as one where the issuer assumes significant insurance risk from the policyholder by agreeing to compensate for adverse impacts of uncertain future events. Entities must exercise judgment to determine whether the risk is significant.
- Scope: Ind AS 117 applies to contracts meeting the definition of insurance contracts, except for certain exclusions like warranties issued by manufacturers, residual value guarantees, and contingent consideration in business combinations.
- Measurement Models:
- General Model: Default method for reassessing liabilities based on future claims.
- Premium Allocation Approach (PAA): Simplified accounting for contracts with coverage periods of one year or less.
- Variable Fee Approach (VFA): Tailored for contracts with direct participation features linked to underlying investments.
- Disclosure Requirements: Entities must provide detailed disclosures about the impact of adopting Ind AS 117, including the effect on financial statements and changes in accounting policies.
Impact on Non-Insurance Entities
Non-insurance entities issuing contracts such as extended warranties, fixed-fee service agreements, financial guarantees, and product breakdown coverages must reassess their accounting practices. The adoption of Ind AS 117 introduces structured measurement and disclosure frameworks, enhancing transparency and comparability. Entities must:
- Evaluate contracts to determine if they meet the definition of insurance contracts.
- Update accounting policies and systems to comply with complex recognition and measurement procedures.
- Provide disclosures about the impact of adopting Ind AS 117.
Ind AS 116: Sale and Leaseback Transactions
Amendment Overview
The MCA introduced amendments to Ind AS 116 on 9th September 2024, effective for periods commencing on or after 1st April 2024. These amendments address accounting for sale and leaseback transactions involving variable lease payments.
Key Changes
- Measurement of Lease Liability: Seller-lessees must measure lease liabilities to ensure no gain or loss is recognized for retained rights of use.
- Illustrative Examples: Appendix D provides examples for determining lease payments in sale and leaseback transactions.
Impact
Entities in asset-heavy sectors like real estate, aviation, and retail must reassess existing sale and leaseback agreements. Financial models and disclosures must be updated to reflect the new requirements, ensuring compliance and transparency.
Ind AS 1: Classification of Liabilities
Amendment Overview
The proposed amendment to Ind AS 1 aligns with changes in IAS 1, focusing on the classification of liabilities as current or non-current. The amendment clarifies that:
- Liabilities are classified as non-current if the entity has the right to defer settlement for at least 12 months after the reporting date.
- Settlement by issuing equity instruments is considered settlement unless the conversion option is classified as equity.
Impact
Entities must reassess the classification of liabilities, particularly convertible instruments and loans with covenant breaches. The amendment enhances consistency in financial reporting and may require updates to loan agreements and debt covenants.
Other important Ind AS practical issues:
(a) Accounting for Payments Received from Suppliers
Overview
Payments from suppliers, such as rebates, incentives, and cooperative advertising arrangements, require careful analysis to determine the correct accounting treatment. Ind AS does not provide explicit guidance, necessitating judgment based on the nature of the payment.
Key Steps
- Exchange of Distinct Goods or Services: Payments for distinct goods or services are accounted for as revenue under Ind AS 115.
- Reimbursement of Costs: Payments reimbursing costs incurred on behalf of suppliers are deducted from the relevant expenses.
- Discounts or Rebates: Payments reducing the cost of purchased goods or services are accounted for under Ind AS 2.
Impact
Entities must evaluate supplier arrangements to ensure proper classification and disclosure. Misclassification can distort financial statements, requiring robust processes to assess the nature of payments.
(b) Accounting for Contingent Payments in Acquisitions
Overview
Contingent payments to employees or selling shareholders in business combinations can be classified as either purchase consideration or post-acquisition compensation costs. Ind AS 103 provides guidance for determining the nature of such payments.
Key Indicators
- Continuing Employment: Payments forfeited upon termination suggest compensation for services.
- Duration of Employment: Payments tied to employment duration indicate remuneration.
- Linkage to Valuation: Payments linked to business valuation suggest purchase consideration.
Impact
Entities must carefully analyze contingent payment arrangements to ensure accurate classification. Misclassification can affect goodwill calculation, profit recognition, and future impairment assessments.
Conclusion
The amendments to Ind AS for the financial year ended 31st March 2025 bring significant changes to financial reporting. Entities must proactively assess the impact of these changes, update accounting policies, and ensure compliance with evolving standards. By addressing these amendments, companies can enhance transparency, comparability, and stakeholder confidence in their financial statements.
