Explained: Ind AS

Summary

This lecture provides an overview of Indian Accounting Standards (Ind AS), focusing on its implementation in India and the challenges faced by the banking sector. It explains the significance of financial statements, such as balance sheets and profit & loss accounts, for company owners and investors. The lecture delves into the gradual shift from domestic accounting practices to Ind AS, harmonizing with international standards like IFRS. A key point is the banking sector’s opposition to Ind AS due to the expected credit loss (ECL) provisioning requirement, which could increase their financial burden significantly. The implementation in the banking sector has been delayed indefinitely.

Takeaways

• 😀 Financial statements like Balance Sheet and Profit and Loss Account are essential for tracking a company's assets, liabilities, revenue, and expenses.
• 😀 The Balance Sheet records assets and liabilities, while the Profit and Loss Account (P&L) helps assess income and expenses to determine profit or loss.
• 😀 Financial statements are important for both company owners, who use them to secure loans, and investors, who assess whether to invest in a company.
• 😀 If a company's Balance Sheet shows liabilities greater than assets, or the P&L shows losses, it may discourage investors from putting money into that company.
• 😀 Indian companies previously followed a different accounting methodology, but since 2011, India has been transitioning to Indian Accounting Standards (Ind AS) to harmonize with international standards (IFRS).
• 😀 The transition to Ind AS is being implemented in phases, starting with listed and unlisted companies, followed by banks and other financial institutions.
• 😀 In 2015, the Ministry of Corporate Affairs (MCA) notified the rules for Ind AS, and the implementation process was planned in four phases, with banks and financial institutions coming in the final two phases.
• 😀 Initially, Ind AS was supposed to be applied to the banking sector starting from April 1, 2018, but due to delays in amending the Banking Regulation Act, the implementation was postponed until April 1, 2019.
• 😀 Most recently, the RBI postponed the implementation of Ind AS for the banking sector indefinitely, citing the need for changes to the Banking Regulation Act and the banking sector's preparedness.
• 😀 A major concern for banks is the Expected Credit Loss (ECL) provision, which requires banks to make provisions for potential loan losses even before loans become non-performing assets (NPAs). This would add to the provisioning burden on banks already dealing with NPAs.
• 😀 The implementation of ECL under Ind AS would have required banks to set aside an additional ₹1.1 lakh crore for provisioning, which was a significant concern for the banking sector, leading to the RBI's decision to postpone its implementation.

Q & A

What are the two primary financial statements mentioned in the script?

The two primary financial statements mentioned are the Balance Sheet and the Profit and Loss (P&L) Account.

What is the difference between the Balance Sheet and the Profit and Loss Account?

The Balance Sheet records a company's assets and liabilities, while the Profit and Loss Account (or income statement) shows the company's revenues and expenses.

How are financial statements used by business owners and investors?

Owners use financial statements to assess their company’s financial health and secure loans, while investors use them to decide whether to invest in a company.

What is the significance of the shift from local accounting standards to Ind AS?

The shift to Ind AS is important for aligning India's financial reporting with international norms, making it easier for global investors and businesses to compare financial information.

Why was the implementation of Ind AS postponed for the banking sector?

The implementation of Ind AS for the banking sector was postponed due to challenges in amending the Banking Regulation Act and the banking sector’s readiness, including concerns over the introduction of the Expected Credit Loss (ECL) model.

What is the ECL model and why is it problematic for banks?

The Expected Credit Loss (ECL) model requires banks to make provisions for potential loan losses even before the loans become Non-Performing Assets (NPAs). This is problematic for banks, as it increases their provisioning burden, particularly when dealing with large amounts of NPAs.

What are the phases of implementing Ind AS, and which entities are covered in each phase?

Ind AS is being implemented in four phases: Phases 1 and 2 cover listed and unlisted entities, while Phases 3 and 4 focus on banks, NBFCs, and other financial institutions.

What did the Ministry of Corporate Affairs (MCA) do to facilitate the shift to Ind AS?

The MCA introduced Ind AS in 2011 to gradually align India’s financial reporting with international standards and notified the Ind AS rules in 2015.

How does the introduction of Ind AS affect the accounting treatment of discounts offered to customers?

Under Ind AS, discounts offered to customers are no longer classified as marketing expenses. Instead, they are deducted from the revenue side of the Profit and Loss Account.

What financial impact would the introduction of the ECL model have on Indian banks?

The introduction of the ECL model would require Indian banks to make additional provisions for potential loan losses, amounting to an estimated 1.1 lakh crore rupees, which would place a significant financial burden on the sector.