UPSC Exam Preparation: Topic of the Day – Indian Accounting Standards (IndAS)
Indian Accounting Standard (abbreviated as Ind-AS) is the Accounting standard adopted by companies in India and issued under the supervision and control of Accounting Standards Board (ASB), which was constituted as a body in the year 1977. ASB is a committee under Institute of Chartered Accountants of India (ICAI) which consists of representatives from the government department, academicians, other professional bodies viz. ICAI, representatives from ASSOCHAM, CII, FICCI, etc.
Scheduled Commercial Banks (SCBs), excluding regional rural banks (RRBs), were required to implement IndAS from April 1, 2018. The RBI has deferred the implementation of Indian Accounting Standards (Ind-AS) for banks by one year.
- GAAP (Generally Accepted Accounting Principles) is a collection of commonly-followed accounting rules and standards for financial reporting.
- International Financial Reporting Standards (IFRS): It is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB).
- Indian Accounting Standards (Ind-AS): accounting standards issued under the supervision and control of Accounting Standards Board (ASB).
The banks currently follow Indian Generally Accepted Accounting Principles (IGAAP) standards. They are issued by Accounting Standards Board (ASB) in India.
- IGAAP relies on the principle of prudence and historical cost of assets instead of their fair market valuation, while IndAS relies on the fair value of assets and liabilities and has a thrust on the substance of contracts more than their legal forms. IndAS provides guidance on
- valuation techniques,
- inputs to valuation techniques (i.e. fair value hierarchy),
- concepts such as highest and best use,
- most advantageous market and principal market and fair value disclosures.
- IGAAP fair value may be entity-specific and not market-based. Under IndAS, fair value is a market-based measurement i.e. it is measured using the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk.
This results in differences in the characterization of financial instruments as well as in revenue recognition.
Legislative change required to implement IndAS:
- The implementation of IndAS for public sector banks requires an amendment to the Banking Regulation Act. The schedule in Banking Regulation Act relating to financial statement disclosures needs to be changed to the IndAS format.
- Section 29 of the BR Act deals with the accounts and balance sheets of public sector banks. Private sector banks are covered by the Companies Act, which is based on the new accounting standards.
- Due to a delay in amending the BR Act, RBI is yet to issue operational guidelines for the implementation of the new accounting standards.
Importance of IndAS:
- Under the current rules, banks set aside money to cover loans that have turned bad.
- Under IndAS, they must make provisions after assessing the expected loss from the time a loan is originated rather than waiting for a trigger event.
- These norms, which are in line with international norms, the International Financial Reporting Standards, were designed to avoid credit shocks like those seen in the aftermath of the global financial crisis in 2008.